While you're on a roll...

After you celebrate your tax filing, plan for next year

SAN FRANCISCO (CBS.MW) -- If you're a taxpayer who sweats profusely come April 15, now is the time to consider the long-term implications of that physical reaction.

Most of us avoid painful events, be it the dentist or a slog through financial records, but those who wait to the penultimate minute to do their tax returns are also likely putting off other key aspects of financial planning.

"You will see a strong correlation between people procrastinating (on) filing tax returns and on more general financial planning overall," said Gary Buffone, director of the Family Business Center in Jacksonville, Florida, which counsels families and family businesses.

The Alliance for Investor Education has gathered a list of Web sites that can help you get started in general financial planning. Meanwhile, to avoid that sinking feeling come next April 15, try riding the roll you're on. You just filed: Start planning now for next year's taxes.

Tax bill outlook

For some taxpayers, it's fairly easy to estimate their tax bill now. For taxpayers who "don't expect any change in income for the rest of the year, I can almost do their return now," said Doug Stives, a certified public accountant with The Curchin Group in Red Bank, N.J.

And with your current tax return in mind, realize there may be ways to reduce your next bill. For instance, if you're receiving mainly wage income and were hit by a higher-than-expected bill this year, consider raising your withholding amount by lowering the number of exemptions on your Form W-4.

For those paying estimated taxes, avoid underpayment penalties by planning to pay either 100 percent of your 2003 tax (110 percent if you had adjusted gross income of over $150,000), or make sure you pay 90 percent of your 2004 tax.

While the alternative minimum tax is difficult to avoid, there are some strategies to consider, such as paying state taxes or real-estate taxes in the following year if you're less likely to be ensnared by the AMT that year. Such taxes are deductible under the standard tax system but not under the AMT.

"We might actually decrease their state withholding or not make estimated payments because those payments will wind up not being deductible," Stives said.

Exercising incentive stock options might have pushed you into the AMT in 2003, so consider delaying or spreading out ISO exercises this year to avoid or minimize the AMT.

"You might be in the alternative minimum tax in alternate years because of the way your expenses flow, but that's better than being in the AMT every year," said Martin Nissenbaum, national director of personal income tax planning at Ernst & Young.

Reduce taxable cash

Whether or not you're caught by the AMT, reducing your adjusted gross income not only lowers your tax bill, but increases the likelihood of being eligible for various deductions.

"Whether or not you're in the AMT, it usually does make sense to try to minimize the amount of your overall income," Nissenbaum said.

For instance, married-filing-joint couples with income around $130,000 might try to maintain it at that number or below to be eligible for the full $4,000 higher-education expense deduction this year, which starts to phase out at higher incomes, Nissenbaum said.

One way to lower adjusted gross income: Maximize 401(k) contributions. "That comes off the top of your wages and reduces your income tax," Nissenbaum said. Contribution limits this year are $13,000, rising to $16,000 for those 50 and older.

Interest income, taxed at ordinary tax rates, is another area to examine. "Interest is really not a good form of income anymore because of the favorable 15 percent rate on dividends," Nissenbaum said.

Instead, consider municipal bonds, he said. "Municipal bonds would avoid federal tax and potentially state tax depending on where the bonds are from. Or consider going into Treasuries so you can at least avoid state taxes."

But be aware that interest income from private-activity bonds that invest in ventures such as sports stadiums and hospitals is taxable under the alternative minimum tax -- don't let this investment push you into the AMT.

And don't make investment decisions solely based on the tax benefits. Any decision should consider your overall asset allocation, attitude toward risk, and market trends.

Big deduction for business owners

Meanwhile, small-business owners should consider reducing income through the Section 179 expense election, under which you can opt to deduct some property as an expense rather than a capital expenditure.

The dollar limit on this deduction is at a premium for the next two years. "You can deduct all of your purchase price if you buy a new computer or a new SUV, you can expense the whole thing up to $100,000 in a small business," Stives said.

The $100,000 limit is in effect for tax years 2003 through 2005, but goes down to $25,000 in 2006.

"We're encouraging our clients: If you need new equipment, update your computers or buy a truck or a van. I'm not telling people to do it for tax reasons, but if you're going to do it anyhow it's a great tax deduction."

Changing your ways

For those struggling to prevail over their procrastinating ways, consider seeking professional financial help, Buffone said.

"The worst thing they can do is try to lick this problem by themselves. They're going to need outside support to change that kind of habit," he said. "They can recruit a friend or a spouse, but more likely it's going to be an objective professional such as an accountant or a financial planner."

Once you get the advice, follow it. "They have to be willing to follow the recommendations that are given, even though they may be painful," Buffone said.

Finally, remember that if you find it hard to overcome your late-filing ways, you're not alone. "It's a difficult problem to resolve. It's usually a reflection of a larger personality issue," he said.

Serious procrastinators "see the control of their life as outside of themselves, but there are all different shades," he said. "Most people who are doing this just don't want to face something unpleasant. It's like going to the dentist. Who doesn't want to put that off?"

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